Why has Google bought HTC's smartphone tech business?

Google has spent $1.1 billion (£815 million) to buy in an [link ulr="https://www.nytimes.com/2017/09/20/technology/google-htc-smartphones.html?_r=0"]estimated[/link] 2,000-person research, development and design team from Taiwanese smartphone maker HTC.

Google's relationship with HTC dates back to the earliest days of the Android operating system. HTC was the first company to make a commercial Android phone, in the form of the Dream, and developed the Nexus One, the first Google-branded phone.

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What does this mean for Google?

For a start, it means that Google now has its own in-house research, development and design staff for its smartphone business. Its previous flagship phone hardware projects – with the exception of the ill-fated Project Ara modular phone – have been made by third-party firms including HTC, LG and Huawei.

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In Google's announcement of the acquisition, senior vice president of hardware Rick Osterloh confirmed the increasing importance of in-house hardware development to go with Google's Android operating system. "Creating beautiful products that people rely on every single day is a journey, and we are investing for the long run," he said.

Osterloh described the newly-hired hardware team as "amazing folks we’ve already been working with closely on the Pixel smartphone line". They're thought to represent around half of HTC's original smartphone development staff, and the company confirmed the team had been heavily involved with previous Google products. Many "are already working with Google to develop Pixel smartphones," HTC said in a statement.

As well as the transfer of experienced staff, Google is getting a non-exclusive licence for HTC intellectual properly, "to support the Pixel smartphone family", which to-date has been heavily based on features and technologies developed by HTC.

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Google has previously dabbled in hardware manufacturing, with its 2011 purchase of US firm Motorola Mobility for $12.5 billion. However, just three years later, in 2014, Google sold Motorola to Chinese technology firm Lenovo for just $2.91 billion, following some well-regarded but ultimately unfocused entry-level smartphones such as the Moto G. Google retained around 2,000 technology patents and the Project Ara modular phone division after the sale.

Analysts have reacted positively to the announcement. "Acquisitions of key HTC assets will give them the hardware technology expertise, the design skills and the experience in smartphone retail distribution they badly need," said Thomas Husson, VP and principal analyst at Forrester. But he also had a word of warning: "Despite acquisitions of Motorola and Nest and a strong hardware push a year ago, Google has not yet been successful at selling consumer devices."

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Where does it leave HTC?

HTC has been beset by financial problems since 2015, largely due to an increasingly competitive smartphone market. Last month, reports indicated that the company could even sell or spin-off its Vive virtual reality business, following rumours that the company was in discussions with Google.

The injection of $1.1 billion will definitely improve the firm's liquidity, although the transfer of about half of its research and design staff, down from around 4,000 to 2,000, may force HTC to narrow its development focus in the immediate future.

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HTC's U11 flagship phone

HTC

Publicly, HTC has said the deal with Google supports the company's "continued branded smartphone strategy, enabling a more streamlined product portfolio, greater operational efficiency and financial flexibility". In plain English, that means HTC will continue to make its own phones, but lose a significant chunk of its staff to Google.

Innovative, high-end phones such as the U11 will continue to form a major part of HTC's business. The company makes it clear that it will also continue to produce its successful Vive virtual reality headset, which is currently winning the PC VR war on the sales front and is widely regarded to have the technological edge on the rival Oculus Rift.

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But while that might be the case in the short term, Gartner analyst Annette Zimmermann warns of tough times ahead for HTC. "I don’t see a turn around for this company and their phone business," she says. "It will diminish further and they will be left with the business they do with some other Asian vendors. Even though they keep the brand we can’t expect many more HTC flagship products in the future."

What does it mean for consumers?

Given that most of the staff involved in the transfer are, according to both companies, already working on Google-branded hardware products, it's likely that consumers will see little immediate impact on either company's planned product lines.

Google will launch its new Pixel 2 devices on October 4 and HTC will continue working on the successor to the U11. HTC has given every indication that it plans to continue making smartphones and release scheduledupdates for existing devices.

Meanwhile, with a dedicated hardware team fully under its own control, Google is better positioned than ever to develop technology that relies on a close relationship between hardware and software.

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"New technologies like Augmented Reality require deeper integration with the hardware," says Forrester analyst Husson. To that end, Google's launch of the Pixel 2 on October 4 shows the company "is finally serious in developing a more tightly-controlled device ecosystem".

For Gartner analyst Annette Zimmermann, the decision is about getting all the necessary technology in-house, rather than relying on partnerships. "This is different than when Google bought Motorola – they were after the patents then. This is for Google to expand its hardware business to get the hardware, software, experience and AI all optimised in the smartphone. I think Google is particularly going after Apple and Samsung in the US market.”

While it's highly unlikely Google will abandon Android's open source roots and wide third-party hardware market to adopt an Apple-style model with absolute control over what hardware its software runs on, we could soon see more innovative features that are released first, best and possibly only on Google's own hardware.